Exchange rate systems

14 flashcards · Economics · by Addaneye

1. What are the three types of exchange rate systems?

   Fixed exchange rates Managed exchange rates Floating exchange rates

2. What is a fixed exchange rate?

   When the value of one currency is fixed against the value of another currency

3. What are the two ways in which a country can maintain a fixed exchange rate?

   Changing interest rates Foreign currency transactions

4. How does changing interest rates help maintain a fixed exchange rate?

   Lower interest rates >> increase in hot money flows >> increase in demand for currency >> appreciation of currency

5. How do foreign currency transactions help maintain a fixed exchange rate?

   If a government sells a lot of its foreign currency reserves on the currency market >> increase in supply of currency >> depreciation

6. How can countries change the value of their fixed exchange rates?

   Revaluation Devaluation

7. What is a revaluation?

   When countries increase the value of their fixed exchange rate

8. What is a devaluation?

   When countries decrease the value of their fixed exchange rate

9. What is a managed exchange rate?

   Where the government will only intervene to keep the value of its currency within the range

10. What is a floating exchange rate?

    When the government or central bank does not intervene and the value of a currency is determined by the supply and demand for the currency

11. What are the two types of exchange rates?

    Nominal exchange rates Real exchange rates

12. What does the nominal exchange rate tell us?

    The price of one currency in terms of another

13. What does the real exchange rate tell us?

    How much a currency is worth relative to the prices of goods and services in another country

14. What is the formula for the real exchange rate?

    (Nominal ER * domestic price level) / foreign price level